Krugman: World Ending (Slowly), Need Huge Spending Stimulus

Paul Krugman correctly predicted that the
financial crisis wouldn't be superficial and wouldn't end
quickly. Now he's out to make sure the lack of a spectacular
economic or market collapse isn't tricking anybody: The economy
is still screwed, he says, and something must be done.

On Housing:

Home prices are down about 16 percent over the past year, and
show no sign of stabilizing. The pain from this bust is widely
spread: there are millions of American families who didn’t buy
mortgage-backed securities and haven’t lost their houses, but
have nonetheless been impoverished by the destruction of much or
all of their home equity.

On Jobs:

Meanwhile, the job market has deteriorated even more than you’d
guess from the jump in the headline unemployment rate. The
broadest measure of unemployment, which takes into account the
rapidly rising number of workers forced to take cuts in paid
hours and wages, has risen from 8.3 percent to 10.3 percent over
the past year, roughly matching its high point five years ago.

On The Fed/Government:

Ben Bernanke and his colleagues at the Federal Reserve have cut
the interest rates they control repeatedly since last September.
But they haven’t managed to reduce borrowing costs for the
private sector. Mortgage rates are about the same as they were
last summer, and the interest rates many corporations have to pay
have actually gone up. So Fed policy hasn’t done anything to
encourage private investment.

The problem is fear: private-sector finance has dried up because
investors, burned by their losses on securities that were
supposed to be safe, are now reluctant to buy anything that isn’t
guaranteed by the U.S. government. And the proliferation of
special rescue packages — the TAF, the TSLF, the Bear Stearns
deal, the Fannie-Freddie thing — may have staved off blind panic,
but has fallen far short of restoring confidence.

The government can't stop house prices from falling (although
Lord knows they'll keep trying) and can't stop dumb-ass loans
from going bad. The Fed can't cut interest rates anymore. So
Krugman says that the answer is massive fiscal stimulus,
presumably in the form of more tax rebates and more
infrastructure spending. However, he's afraid both Obama and
McCain are too tied to the ideals of the free market to solve the
crisis.